Sometimes when you argue taxes with socialists they will invoke the “income effect”: taxes could end up making everyone work even harder since the tax lowers the marginal value of money. Some Austrian economists have tried to refute this argument by denying the very existence of an income effect. Yet this clearly does not hold up since the income effect can be derived using the Austrian value-scale approach. But there is another fundamental point: getting people to work more, even though it doesn’t create more useful goods and services (the money goes to public spending after all), is clearly not a good thing since it will certainly reduce society’s total utility because of the decrease in leisure. (Full Article)
Source link: http://archive.mises.org/2284/does-the-income-effect-argue-for-taxes/
Does the Income Effect Argue for Taxes?
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I would replace “at least partially” by “mainly”. I realize that Austrians do not believe in statistics or in the relevance of GDP-type aggregates, but the (negative) correlation between government spending (in, say, OECD countries) and 10/20 years GDP growth is quite impressive. I can’t remember the source but if memory serves me right, it is somewhat above 80%. This may be no proof of a cause and effect relationship, but let’s say it’s “nice to have”.
You failed to point out that although the cheetah who was robbed by the lion has a higher incentive to work harder (kill another prey), he may not have the energy reserves to do so and may have to sit and wait until prey is very close before he attacks or he may die of starvation chasing his prey.
Even when the lion returns a portion of the kill to the cheetah, I can guarantee that it will be smaller than the portion that the cheetah would have gotten had the lion not stolen the kill in the first place. This results in a net “positive income effect”.
With high government taxation, people cannot afford to accept lower paying jobs (harder to obtain prey) due to the high taxation resulting in their lowered marginal utility to employers and higher cost of living for them. The job must pay enough to cover transportation, medical, clothing, lodging, and food expenses. These are the costs of employment. Higher taxation forces one to hold out for the “good jobs”.
I have seen many people refuse salaries in California because they could not afford a mortgage with the offered salaries. True, if no better quality of life options existed, a job seeker could still share lodging by either sharing a house or downsizing considerably, so we have not reached the point where unemployment is completely involuntary, but high taxation does push us in that direction.
It seems ironic for socialists to argue for an income effect, since the most socialized countries regulate wages and hours worked, and therefore provide the least opportunity to increase one’s income. Would a worker in France, for example, be allowed to work an extra five hours per week?
Trask on Hamilton on Taxes:
– Ten Recurring Economic Fallacies, 1774–2004
Karlsson gives us a great piece here, in my opinion.
One thing I think he missed, though, regarding the substitution effect and transfer payments: What about charitable giving and religious organizations?
When churches (and other voluntary charities) are the primary providers of poverty relief, there is a greater demand for religious services, and also a greater supply of charitable donations. It seems to me that the fall of religion in many countries can be simply explained by the rise in government poor relief.
One important effect ignored in most discussions of government vs private is not who benefits, it is the cost of overhead. Private companies, regardless of the service provided, have an incentive to reduce the management overhead. Government offices and government managers have only incentives to increase the size of their office, and therefore their pay. Just managing the movement of tax money is not productive, and does not increase the wealth of the nation. Just as Tax Accountants and Tax Lawyers exist only to assist a company with laws and regulations, they would not exist if the tax law/taxes did not. This is one of the reasons the Founding Fathers strictly limited the areas in which the Federal Government could intrude, as the size of government increases, so does the non-productive portion of the economy.
You could therefore say that in at least one respect, taxation causes involuntary unemployment. However, I have actually seen Austrians try to deny even this, claiming taxation will only diminish wages, and employment regulations are responsible for all involuntary unemployment.
SilasXdX and Steven M,
Someone refusing a job offer because he finds the salary offered too low is actually an example of voluntary unemployment. This is true whatever the reason: whether the salary offered would force him to reduce his standard of living, or he thinks he may get a better opportunity by searching further, or his has enough personal wealth or is collecting enough welfare/unemployment benefits to render the offer unattractive relative to leasure, or any combination of these reasons.
Essentially, taxation and unemployment/welfare benefits both contribute to make leasure more attractive than work, and therefore cause voluntary unemployment. It is in fact minimum wage laws that cause involuntary unemployment.
I would only call it voluntary only if he could afford to work at job A, but chooses not to do so.
The fact is that many available jobs offer negative salaries when the expenses of acquiring and retaining the jobs are considered and many more jobs would be offered if anyone thought that people would bother considering them. (Sure one could accept a part-time low wage job 100 miles away from any avilable affordable lodging, but accepting such a job would be neither sensible nor sustainable. If all jobs available to someone were of that nature (fortunately, that is not the case), then his unemployment to be voluntary.) Voluntary unemployment only arises when there exists at least one job that offers a net income and the job is refused or coercively restricted.
Of course, some individuals may still choose to work at sub-sustainable levels due to pride or a desire for training, but obviously that is either a temporary relationship or someone else is footing the bill.
Steven M,
Negative salaries huh? Sounds like good work, if you can get it. Problem is, a job is either enough to pay for your food and shelter subsistence items, or it is not. Of course it’s quite plausible to assume, without going through the minute steps of proof as to why, that no employer is hiring for sub-subsistence paying jobs, since dead people don’t work. Further, I’ve never heard of a job where you show up, punch in, pay them, and loiter for 8 hours. That’s not a job, it’s a casino. Your example of living 100 miles away hardly changes anything, anyway. The hypothetical job seeker either voluntarily chooses to move and take the job, voluntarily chooses to make the commute because he judges the net benefits are, to him and his subjective value scales, ranked higher than the next most valuable alternatives, or he voluntarily refuses the job. Either he voluntarily does this, or he is coerced. Since I see no coercion whatsoever, I’m inclined to stick with this being voluntary employment. Man has no “right” to convenience.
“Voluntary unemployment only arises when there exists at least one job that offers a net income and the job is refused or coercively restricted.”
Giving no reasons why anyone should believe this, I can only assume you have some sort of valid proof why we should, but witheld it for your own motives.
A principle of charity?
First of all, you don’t get to decide what jobs offer net incomes and which don’t. If a man has to take a long trip to work, his values will decide how much that is worth compared to his foregone alternatives, not you. I’m sure we all appreciate your inner do-gooderness, but the subjective theory of value doesn’t require it. As for the middle premise, as long as “the job is refused” caveat applies to both sides of the ledger, I would wholly agree. A man is not involuntarily employed simply because a prospective employer doesn’t deem his services adequate for a permanent position. Although I have a hunch this is whence you derive your last and strange addendum of coercive restriction, how this contrasts to voluntary unemployment is anyone’s guess.
Adam
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